11/17/2014. Private consolidation loan. Federal Direct Consolidation Loan. Advanced Student Loan Strategy

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1 Advanced Student Loan Strategy Heather Jarvis Today s Plan The Big Picture Interest rates are a moving target Consolidation then and now Comparing repayment options driven repayment in depth Advising married student loan borrowers Public Service Loan Forgiveness Eye on policy Q&A Tatiana works as a veterinarian with a Income starting driven forgiveness is salary of $60,000 and gets 4% annual salary taxable as increases. income! Year Total paid AGI 54,000 63,172 72,589 88, , year 1,174 1,174 1, , year ,583 0 Forgiven IBR , ,362 64,644 18,746 (tax) PAYE , ,743 37,528 (tax) Juan Carlos works as an Assistant District Attorney with a starting salary of $40,000 and gets 4% annual salary increases. Year Total paid AGI 36,000 42,115 51, year 1,174 1,174 1,174 $140, year $245,583 0 PSLF is NOT taxable as income - wow Forgiven IBR $35,856 $136,644 PAYE $23,904 $148,596 Today, there are two kinds of consolidation loans to consider EVALUATING CONSOLIDATION It a int what it used ta be Federal Direct Consolidation Loan Private consolidation loan 1

2 Private consolidation loans with good terms are available for borrowers with good credit Some clients can improve loan terms But be aware of federal protections and flexible repayment provisions a borrower may give up IF he or she consolidates federal loans into a private consolidation loan Federal loans FFEL & Direct BE CAUTIOUS AND INFORMED Private consolidation loan Private loans Federal loans FFEL Direct NOT private loans Private loans Federal Direct Consolidation Loan FFEL Direct FFEL FFEL Stafford Direct Stafford INTEREST RATES Direct Consolidation Loan 12 2

3 Before 2006, federal loans had variable interest rates Since 2006, new federal loans are at fixed interest rates set by Congress Beginning July 1, 2013, federal student loan interest rates are tied to the market Private student loan interest rates are based on creditworthiness and are nearly always more expensive Interest rates Beginning July 1, 2013, rates are tied to the market: Rates for subsidized and unsubsidized loans to undergraduate students are: 10-year Treasury rate plus 2.05 percentage points (presently 3.86 percent), capped at 8.25 percent Rates for unsubsidized loans to graduate students are: 10-year Treasury rate plus 3.60 percentage points (presently 5.41 percent), capped at 9.50 percent Rates for GradPLUS and Parent PLUS loans are: 10-year Treasury rate plus 4.60 percentage points, (presently 6.41 percent) capped at percent Federal Direct Consolidation Loan interest rates Fixed interest rates based on the weighted average of the underlying loans Capped at 8.25 percent for consolidation loans borrowed before July 1, 2013 For loans borrowed on or after July 1, 2013, there is no cap Yesterday s reasons to consolidate federal student loans To access lower monthly payments through longer repayment periods To group loans together with one lender or loan servicer To lock in a fixed interest rate on loans issued at variable rates But consolidating isn t the best way to lower payments anymore But the split servicing problem is mostly solved at this point But variable rate loans haven t been issued since Today s reasons to consolidate federal student loans To lock in a low fixed interest rate (but that only applies to people who haven t already consolidated old loans) To access more specific repayment or forgiveness provisions (if he or she qualifies for them) If he or she has pre-2006 variable interest rate federal loans (either FFEL or Direct) If he or she has pre-2010 FFEL loans Federal Student Loans COMPARING REPAYMENT OPTIONS 18 3

4 Federal Loans Offer Many Repayment Options Standard Graduated Extended Adjusted Gross Income Sensitive Alternative Contingent Income driven repayment Based Pay As You Earn driven repayment Contingent Repayment Pay As You Earn Based Repayment Contingent Repayment Based Repayment (for those who are not new borrowers* on or after July 1, 2014) Pay As You Earn (for new borrowers on Oct 1, 2007 and borrowed on or after Oct 1, 2011) Based Repayment (for new borrowers* on or after July 1, 2014) 20 percent of discretionary income, or what borrower would pay on a fixed payment over the course of 12 years, adjusted according to income 25 year forgiveness Interest capitalization cap 15 percent of discretionary income, but never more than the 10-year Standard Repayment Plan amount 25 year forgiveness No interest capitalization cap 10 percent of discretionary income, but never more than the 10-year Standard Repayment Plan amount 20 year forgiveness Interest capitalization cap 10 percent of discretionary income, capped at the 10- year Standard Repayment Plan amount 20 year forgiveness No interest capitalization cap driven repayment advantages Affordable monthly payments Two possible paths to forgiveness: Possibility of forgiveness that is NOT tied to employment Occurs after making payments based on income for years (depending on the income driven repayment plan) IF a balance still remains at that point Possibility of forgiveness that IS tied to employment (Public Service Loan Forgiveness) Occurs after making 120 QUALIFYING payments over at least 10 years IF balance still remains at that point Interest subsidy and capitalization rules Who should consider income-driven plans? Government and nonprofit employees High-debt graduate and professional borrowers Because they might benefit from Public Service Loan Forgiveness Because they might benefit from income driven forgiveness Borrowers with low income as compared to debt 4

5 driven repayment disadvantages Negative amortization means lots of interest adds up Payments are based on income reported on tax returns so married people must sometimes trade off tax benefits for student loan benefits Possibility of substantial tax liability upon forgiveness Paperwork like you ve never seen Married student loan borrowers must choose: File taxes jointly and have monthly payment based on joint AGI and combined student debt, or File taxes separately and have monthly payment based on individual AGI and individual student debt Rachel and James Gomez James earns $45,000 as a police officer. His wife Rachel earns $60,000 as a lawyer. Rachel and James have no children. James owes $25,000 on his eligible federal student loans Rachel owes $75,000 on her loans (She owes 75 percent of the total marital student loan debt). Comparing Taxation Tax Filing Status Adjusted Gross Income Annual Tax Due Jointly $102,500 $14,439 $14,439 Separately Difference Hers: $60,000 His: Hers: $45,000 $9,401 His: $5,660 Combined Annual Tax Due $15,061 Filing jointly saves $622 on this year s tax payment. Tax Filing Status Jointly Separately Difference Monthly IBR Payment Hers: $743 (75% of total) Hers: $459 His: $248 (25% of total) Combined Monthly IBR Payment $991 $11,892 His: $272 $731 $8,772 Filing jointly requires $260 more monthly in student loan payments Combined Annual IBR Payment Filing jointly requires $3,120 more annually in student loan payments Although AGI is driven by federal tax return, family size is not. 5

6 Loan Repayment Assistance Programs and Loan Forgiveness Public Service Loan Forgiveness is earned by making payments School-Based LRAPs Public Service Loan Forgiveness State-Based LRAPs Profession specific programs Employer LRAPs driven repayment plan forgiveness 120 qualifying payments Public Service Loan Forgiveness What s up with Congress and the Administration? 1. Make the right kind of payments, 2. on the right kind of loans, 3. while working in the right kind of job. 4. Repeat 120 times. 5. Prove it. Questions? askheatherjarvis.com 6